24.6.1 It is common practice to limit the ability of the Authority and the Contractor to make claims against each other for breach of obligation under the Contract. The rationale for limiting this ability is that the Contract payment mechanism is structured to ensure that there is an incentive to perform and that any deduction as a result of the payment mechanism reflects the loss to the Authority and so should usually be the exclusive remedy of the Authority. See Clause 7.8 (Payment Mechanism: No double remedy).
24.6.2 The issues here are similar to those in Section 4.2 (Liquidated Damages). This is because the issue of when liquidated damages and general damages claims are appropriate are closely connected. The Authority should strive to ensure that the performance payment mechanism works in such a way as to ensure that during the term of the Contract the absence of the Service reflects the costs the Authority incurs in not receiving the Service.
24.6.3 There will, as described in Section 4.2 (Liquidated Damages), be circumstances in which relying on the non-payment of the Unitary Charge is insufficient to compensate the Authority for its loss. For the reasons given in that Section, liquidated damages may be appropriate. A general damages claim for service failures is not something that the Authority should seek to obtain or preserve.419 A combination of the payment mechanism and market value assessment should deal with issues that are required to be covered. To the extent particular categories of claim need special treatment, they should explicitly be dealt with in Clause 24.3 (Indemnity).
24.6.4 On a termination for Contractor Default, the Contractor will have an ability to pursue claims against Sub-Contractors (this right will be taken as security by the Senior Lenders). This can lead to the Authority reasoning that it should have a right to claim in such a situation too. This may be the case in some situations (as described above), but in many cases (and probably most cases) the deductions from termination compensation payments will reflect any amount which, in traditional procurement, the Authority would normally expect to claim from the Contractor (see further Section 31.7 (Subordination and Related Provisions)).
24.6.5 On termination for Contractor Default, not all amounts which the Authority could claim on a termination are reflected in a reduced market value compensation payment. Examples would include claims under Clause 24.3 (Indemnity), Section 26 (Information and Confidentiality) and Section 27 (Intellectual Property Rights) and claims against the Authority by third parties. To the extent these claims are not deducted from the market value payment (for example for reasons set out in Section 12 (Payments and Set-off)), they should continue to be exercisable after termination. Such rights should therefore if relevant be included in any collateral warranties.
24.6.6 The limits on liability within collateral warranties should be within the overall required limits on indemnities within the Contract (and, by implication, the Sub-Contracts) (see Sections 24.3 (Indemnities) and 24.4.1 (Collateral Warranties)). Accordingly, claims against indemnities which reduce the capped liability within the Contract should have the same effect on the maximum liabilities under the collateral warranties and vice-versa. The Authority should assess the optimum level of such a limit, taking into account all circumstances, such as value for money, consideration of specific rules and the issues referred to above.
24.6.7 Care should be taken to ensure that amounts dealt with under the payment mechanism or market value compensation on termination payment are not capable of being claimed, as this could result in double counting.
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419 The Authority should recognise the importance of the relationship between its right to claim damages for breach of Contract, its ability to make deductions from the Unitary Charge and the scope of the indemnity provisions. For example, if the majority of the Contractor's income is generated through third party use or through charging the public for use of the Services, the Unitary Charge may be insufficient to allow the Authority to make deductions that are a realistic reflection of its loss. In such circumstances the Authority should not limit its right of recourse to deductions in the Unitary Charge.